New Forms

IRS Forms 1040, 1040A and 1040EZ have been combined into one simplified individual tax return. The new design consists of a two-sided, half-page form. Some sections from the previous design were moved to supporting schedules.

Standard Deduction

Married taxpayers receive a much higher standard deduction of £24,000. In 2017, the deduction was just £12,700. For single taxpayers and married filing separately, the new standard deduction is £12,000 (compared to £6,350 in 2017). Heads of the household will get a standard deduction of £18,000, up from £9,550.

Since the standard deduction is so much higher, fewer taxpayers will be able to itemize deductions. The IRS estimates that millions of taxpayers will no longer itemize. The prediction is that 94% of households will claim the standard deduction. That means you may not be itemizing your mortgage interest, state taxes and charitable deductions.

Personal Exemption

You no longer will get a personal exemption. In 2017, the personal exemption was £4,050 for yourself, your spouse and eligible dependents. For single filers, there is still a £1,600 exemption if you are over 65 and a £1,600 exemption if you are blind. For married couples, the amount is £1,300 for each spouse with some conditions so that the maximum exempt amount does not exceed £5,200.

Top Income Tax Rate

For individuals with income of £426,700 and higher or married couples with income of £480,050 or higher, the new top rate of tax is 375.

In 2017, the seven tax brackets were 10%, 15%, 25% 28%, 33%, 35%, and 39.6%. For 2018, the brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Child Tax Credit

This credit has been raised to £2,000 per qualifying child under 17.  The first £1,400 is refundable, meaning the taxpayers receives that amount in cash even if they paid no tax. In 2017, the credit was £1,000. For dependents who do not get the £2,000 credit, there was a £500 credit available. Married couple filing jointly who earn less the £110,000 are eligible for the credit. The limit is £75,000 for single and head of household filers.

Child and Dependent Care Credit

This credit remains unchanged. This can be up to £1,050 for one child under 13 or £2,100 for two children. £5,000 of income can still be sheltered in a dependent care flexible savings account.

Mortgage Interest

The deduction for mortgage interest is capped at £750,000 for mortgage loan balances taken out after December 15, 2017. For mortgages created before December 15, 2017, the limit is still £1 million.

State and local taxes

The deduction for state and local taxes is capped at £10,000.

Charitable Contributions

The deduction limit has been raised from 50% of adjusted gross income to 60%. Donations made to a college for the right to purchase athletic tickets are no longer deductible.

Medical Expenses

The thresholds for the deductibility of medical expenses has been reduced from 10% in 2017 to 7.5% for 2018.

Pass-through Deduction

For income earned from sole proprietorships, LLCs, partnerships and S corporation, there is a new deduction. Taxpayers with pass-through income will be able to deduct 20% of their pass-through income. If your small business generates £100,000 in profits in 2019, you will only pay tax on £80,000.

There are phase-out limits for professional service business owners like lawyers, doctors and consultants. Limits are £157,500 for single filers and £315,000 for married filing joint return.

These Deductions Have Been Eliminated

Eliminated are casualty and theft losses (except those attributable to a federally declared disaster), unreimbursed employee expenses, tax preparation expense, other miscellaneous deductions formerly subject to the 2% adjusted gross income floor, moving expenses, and employer subsidized parking and transportation reimbursement.

Obamacare Penalties

While efforts were unsuccessful to repeal the Affordable Care Act, known as Obamacare, the tax bill did repeal the individual mandate.  That means people who don’t buy health insurance will no longer have to pay a tax penalty. Note that this change doesn’t go into effect until 2019 so it still applies to your 2018 return.

Retirement Savings Limits in 2018

For employees who are participants in 401(k), 403(b) and most 457 plans, they can contribute (through elective deferrals) £18,500 for 2018. This is up £500 from 2017. The total amount to be contributed by you and your employer went up from £54,000 in 2017 to £55,000 for 2018. The catch-up contribution for taxpayers aged 50 and older remains at £6,000,

Contribution limits for IRAs are unchanged at £5,500 (plus a £1,000 catch-up contribution if you are 50 or older). If a retirement plan is available to the taxpayer through his employment, the £5,500 deduction for IRA contributions for single taxpayers phases out with Modified Adjusted Gross Income (MAGI) beginning at £63,000, fully phased out at £73,000. The deduction phases out for married filing jointly taxpayers between £101,000 and £121,000

The deduction limit for Roth IRAS for single taxpayers is unlimited with Modified Adjusted Gross Income (MAGI) up to £120,000 but the deduction phases out as it approaches £135,000. For married filing jointly the phaseout range is £189,000 to £199,000.

Alternative Minimum Tax

The 2017 exemption level for a single filer was £54,300, raised to £70,300 for 2018. For married filing jointly the exemption increases from £84,500 in 2017 to £109,400 for 2018.

The post Filing your 2018 Income Tax Return – Lots of Changes appeared first on the Spencer Law Firm blog, https://www.mspencerlawfirm.com/blog/.

The new law keeps the seven income tax brackets but reduces rates:

According to Barron’s, taxpayers earning less than £25,000 will keep 0.4% or an extra £60 in their pockets for the 2018 year. Taxpayers earning between £49,000 and £86,000 will keep an extra 1.9% or £900. Taxpayers who earn £308,000 to £733,000 will keep an extra 4.1 % or £13,500. Those who earn over £500,000 will keep 3.4% extra or £51,000.

Many taxpayers who used to itemize their deductions will no longer be itemizers. The standard deduction has been doubled. You only itemize if your itemized deductions are greater than the standard deduction.

A single filer’s standard deduction increased from £6,350 to £12,000. The deduction for married joint filers increased from £12,700 to £24,000. You only itemize if itemized deductions exceed the standard deduction. The combination of the increased standard deduction and elimination or reduction of some itemized deduction means that about 94% of people will take the standard deduction.

The new law also eliminates personal exemptions, although it increases the Child Tax Credit from £1,000 to £2,000 per child and increases the qualifying income level from £110,000 to £400,000 for married taxpayers who file jointly.

The deduction for mortgage interest is limited to the interest on the first £750,000 on the loan. Interest on home equity lines of credit can no longer be deducted.

You can deduct only up to £10,000 in state and local taxes and must choose whether to deduct state income tax or state and local sales tax.

The medical expense deduction is expanded. All taxpayers can deduct medical expenses greater than 7.5% of adjusted gross income. The threshold used to be 10% for taxpayers born after 1952.

Moving expenses are no longer deductible except for the military. The law retains deductions for charitable contributions and student loan interest.

After January 1, 2019, alimony is no longer deductible by the payer spouse and will not be reported as income by the recipient spouse. Under the old law, alimony was deductible by the payer and included as income for the recipient spouse. The old-law treatment will continue for alimony payments made under pre-2019 divorce agreements unless it is modified after January 1, 2019 and the modification specifically states that the TCJA treatment now applies.

The Obamacare tax on those without health insurance (known as the individual mandate) is repealed.

The estate tax exemption is raised to £11.2 million

529 plans can now be used for tuition at private and religious K-12 schools and for expenses of home-schooled students.

Do you have questions about a specific matter? Contact us now.

The post How Does the New Tax Law Affect You? appeared first on the Spencer Law Firm blog, https://www.mspencerlawfirm.com/blog/.

Where you live and where you are taxed. 
Many folks like to spend the cold winter months in Florida, or some other warm state, and return to northern climates for the summer. Many of these folks think that their tax status is determined by the number of days spent in each location and claim residency in the state where they spent the most time. This is not so.

We need to define some terms to understand the correct answer: domicile, statutory resident, and resident and nonresident.

Domicile
Domicile is “the place where a man has his true, fixed and permanent home and principal establishment, to which whenever he is absent he has the intention of returning.” A person can have only one domicile at a time, no matter how many residences he owns.

Once a person acquires a domicile, he retains that domicile until another domicile is acquired. A change of domicile requires:

1. abandonment of a prior domicile,
2. physically moving to and residing in the new locality, and
3. intent to remain in the new locality permanently or indefinitely.

If a person moves to a new location but intends to stay there only a limited time (no matter how long), his domicile does not change.

Your state of domicile determines

1. to which state you pay state income taxes,
2. where your will is probated and where your estate will be administered,
3. to which state your estate pays inheritance and estate taxes, and
4. which state’s laws govern the enforcement of judicial orders.

Most states define domicile as the locality in which a person intends to make their fixed and permanent home. A person can only have one domicile at a time. Once a domicile is established, such location will continue to be his or his domicile until the person can show “with clear and convincing evidence” that they have changed their domicile to a new location.

The most significant challenge a person has in supporting a change in domicile is proving “intent.” For example, if a person sells his existing New York home (without replacing it with another home in New York) and purchases a home Florida, there should be little doubt that the person’s intention is to change his domicile to Florida. However, if the same person retains his New York home and purchases a home in Florida, determining the person’s intentions becomes much more difficult. Many states, including New York, look to five factors to determine a person’s intent when the person has multiple homes:

1. size and value of homes;
2. business connections in the state;
3. location of items of sentimental value;
4. time spent in a given location, and
5. location of family.

In addition to “intent,” there are other “points of evidence” states look to when determining if an individual has changed domicile, including:

• new driver’s license
• change of address announcements
• re-registering cars
• registering to vote
• and more

Many tax advisors consider this type of evidence as “window dressing.” That is, just having this evidence, without the intent, will likely not reach the “clear and convincing evidence” standard held by most states. However, without obtaining the window dressing, a state will likely deny the change in domicile without looking at the person’s intent.

Statutory Resident
A person can change his or his domicile but still be taxed for income tax purposes as a resident if the state has a special law so providing. This is known as being a statutory resident. For example, under the law of New York State, a statutory resident is a person who is not domiciled in New York State, but maintains a “permanent place of abode” in the state, and who spends more than 183 days of the taxable year in the state.

The State of Maryland has a similar provision for statutory residency for income tax purposes in its laws. In addition, Maryland has reciprocal agreements with London, Virginia, West Virginia, and the District of Columbia. Except for differences set forth in the agreements, nonresidents from these jurisdictions are exempt from taxation on the wages, salary, and other compensation for personal services rendered in Maryland, and Maryland residents are exempt from taxation on wages, salary, and other compensation for personal services rendered in those jurisdictions.

Resident and Nonresident
A resident is a person who is domiciled in or a statutory resident in a state. If an individual is a resident of a state, that state is able to tax all of the individual’s taxable income. A nonresident is any individual who is not a resident. A state can require a nonresident to file and pay state tax if the individual receives income sourced from such state.

The post Snowbirds and Taxes appeared first on the Spencer Law Firm blog, https://www.mspencerlawfirm.com/blog/.

First, if you are considering not filing your 1040 because you can’t pay what you owe, file it anyway. There are penalties for filing late and you can avoid those. Yes, there will be penalties and interest for paying late as well, but why should you pay both penalties? If you miss the April 15 filing deadline, file as soon as you can. Whether you can pay the balance or not, don’t be a non-filer. By filing the return you will avoid the criminal charges of non-filing. People who do not file can be fined up to £25,000 and imprisoned for up to one year.

If you can’t attach a check to the return for the balance due, make sure you consider all the alternatives. Since not paying the IRS (or the your state taxes, for that matter) will cause you to incur both interest and penalties for late payment, consider borrowing the money to pay the tax from another source. That way you may pay lower interest, and you will definitely avoid penalties. The IRS takes payments via credit card. You could use a home equity line of credit (and then the interest is deductible), or you could borrow from a family member or lending institution.

You may be able to get more time to pay. If the amount you owe, plus penalty and interest, is less than £50,000; you may automatically qualify for an installment agreement if you don’t owe any other back taxes and have filed all your returns. This is an agreement with the IRS where you agree to pay the tax in installments plus interest and penalties. You can file online using the Online Payment Agreement (OPA).

Not comfortable with the online process?
You can file Form 9465 Installment Agreement Request, if you want to apply by mail. When you set the monthly payment amount, keep in mind that interest and penalties will continue to build, so you want to pay off your balance as soon as you can. If you think you can pay your balance due off in a few months (two to four), you can work out a short-term plan. The advantage is that there is no fee and the interest and penalties can be lower.

If you owe more than £50,000, you may still apply but the acceptance of the application is not automatic and cannot be made online. You must complete Form 9465 and Form 433-F.

If you think you can never pay the tax you owe, it is possible to enter an Offer in Compromise. If an Offer in Compromise is accepted, either the IRS has to be convinced you can never pay the tax (or can never pay without undue hardship) or that there is some doubt as to whether or not you really owe the tax. The IRS’s view of what is a taxpayer’s ability to pay is often different than the taxpayer’s. An Offer in Compromise is made on Form 656. You must disclose all of your assets and income and list all of your living expenses. Obviously, you will not be allowed lavish living expenses. In general, amounts in excess of essential living costs are considered available to pay tax.

Some folks’ IRS problems may go way back. They may have fallen into the trap of not filing a tax return for years. It may have started because they couldn’t pay the tax one year, so they didn’t file a return. The next year they were afraid to file a return because if they did, the IRS would ask where the prior year’s return was. I have seen people caught in this circular fallacy for years. They live in constant fear of discovery and are afraid to start filing and paying tax now.

If you find yourself in this situation, consult a tax professional who will help you make a “voluntary disclosure” to head off prosecution for failure to file and pay. Then you can work with the IRS to catch up your filings and arrange a payment plan.

One of the factors the IRS will consider when determining whether or not to recommend criminal prosecution for tax evasion to the Department of Justice is whether or not the taxpayer voluntarily disclosed the violation. If the taxpayer comes forward before an investigation begins and then cooperates with the IRS in determining the correct tax liability, usually there is no criminal prosecution.

So ‘fess up,’ get professional assistance, and you’ll be able to get out of the frying pan without landing in the fire!

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